Question

Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000.Calculate the accounting profit and the economic profit for Gomez

Answer 1

Answer:

$37,000 and $13,000

Explanation:

The computation of the accounting profit and the economic profit is shown below:

Accounting profit = Total revenue - explicit cost

where,

Explicit cost = cost of helper + annual rent + material cost

                    = $12,000 + $5,000 + $20,000

                    = $37,000

So, the accounting profit is

= $72,000 - $37,000

= $35,000

And, the economic profit is

= Revenue - explicit cost - implicit cost

where,

Implicit cost = renting equipment + working for competitor + worth of entrepreneurial talents

= $4,000 + $15,000 + $3,000

= $22,000

So, the economic profit is

= $35,000 - $22,000

= $13,000